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Business

Family Business

Is running your family’s business in your DNA?

Family businesses are unique — shaped and driven by the different personalities, values, knowledge and relationships of involved family members. The interests of different family members versus the interests of the business create a dynamic that requires both understanding and ongoing communication.

There’s no business like family business

Family businesses are generally structured and run in one of these ways:

  • Owned and operated by one individual, such as the founder. Other family members may be employed by the company.
  • Owned by multiple family members, but operated by only select family members. Inactive shareholders delegate decision-making authority to others for the family's collective interest.
  • Owned by multiple family members who may or may not be involved in the management of the business. Often in long-established businesses, outside management teams may run the company with family members/shareholders serving on the board of directors.

 

 

Your role

Before you take the plunge into your family business, consider this:

  • Are you passionate about this and is it one of your top career choices?
  • Will it help you achieve personal, professional and financial goals?
  • Can you commit the time needed to see if it works for you — even if it's five years or more?
  • Would you start at the bottom and work your way up? Or do you expect to start at the top?
  • Are you concerned about how your involvement may affect your family relationships?

Tip

Each family member employed by the company may approach the business with personal expectations that can impact the business and its management. Your role within the family may set preconceptions or expectations for your role within the business, and vice versa. It’s important to discuss and clarify these expectations explicitly.

 

 

How do you operate?

Just like your family, every business operates differently. It's important that you understand the legal structure of your family's business. Different structures have different tax implications and can impact your ability to borrow money, attract investors or handle legal situations.

C Corporation

  • Issues stock to shareholders who may or may not vote
  • Operates separately from any assets of the shareholders
  • Limits shareholder risk
  • Pays income tax and issues taxable dividends to the shareholders, creating double taxation
  • Usually has restrictions on transferring closely held company stock

S Corporation

  • Is legally structured like a C corporation
  • Pays no income tax by passing it through to shareholders
  • Eliminates double taxation problem caused by C corporation status
  • Adheres to operating requirements that don't apply to a C corporation

Limited partnership

  • Is represented by joint ownership agreements that are more flexible than corporations
  • Has a general partner (usually a one- to two-percent owner) who runs the partnership and assumes personal liability for any action
  • Includes limited partners who have no management control or personal liability
  • Offers more flexibility than a corporation if changes in partnership need to be made
  • Pays no income tax by passing it through to partners

Limited liability company

  • Acts as a hybrid of a traditional corporation and a limited partnership
  • Includes all owners of the company (i.e., members), who have limited liability for company actions

 

Take the quiz

Which of these business legal structures creates a form of "double taxation"?

You’re right.

A C corporation must first pay income tax at the corporate rate before any profits can be paid to shareholders. Then any profits that are distributed to shareholders through dividends are subject to income tax again at the recipient's individual rate, creating a form of double taxation.

Sorry.

A C corporation must first pay income tax at the corporate rate before any profits can be paid to shareholders. Then any profits that are distributed to shareholders through dividends are subject to income tax again at the recipient's individual rate, creating a form of double taxation.

Looking ahead

Being successful tomorrow starts with asking 10 important questions today.

  • What is the business outlook for the company?
  • Will it be viable as an independent company for many years to come?
  • Is there a plan to sell the company or take it public?
  • Who is running the company today?
  • What's the management succession plan?
  • If your parents or grandparents own the majority of the company, is there a plan in place on how the company will be transferred to the next generation and how taxes owed due to the transfer will be funded and paid?
  • Is specialized knowledge required to run the company? Do I have the knowledge or can I acquire it?
  • If only a few family members are involved in the company, what rights do the other family members have with respect to decisions affecting the business?
  • Am I prepared to work closely with other family members on a daily basis?
  • Are there areas of the business that hold special appeal for me, such as sales, financial management or manufacturing?

Take the quiz

What percentage of family businesses make it to the third generation?

That’s right.

Less than 30% of family businesses actually make it to the third generation. That's why succession planning is so important.

Nope.

Less than 30% of family businesses actually make it to the third generation. That's why succession planning is so important.

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